Roche in $5.7 billion bid for gene decoder Illumina

ZURICH/LONDON Swiss drugmaker Roche Holding AG ROG.VX has offered $5.7 billion in cash in a hostile bid to take over Illumina Inc (ILMN.O), and investors are already betting that the U.S. gene sequencing company will command a significantly higher price.

Gene sequencing is central to the future of medicine as it allows researchers and physicians to better predict which patients are likely to respond to a particular drug.

Illumina is a market leader in the sequencing machines that give details on an individual's genome. Their products would nicely complement Roche's world-leading position in cancer drugs, which are increasingly being developed with companion diagnostic tests to determine the best fit with patients.

Illumina's value to Roche was evident in a 45 percent jump for its shares on Wednesday, putting them more than $10 above Roche's offer of $44.50 per share.

"The market is clearly pricing in here a very high probability of a deal being done at $55 to $60 (per share)," said Deutsche Bank analyst Ross Muken.

"The real question becomes whether or not we see another bidder, and that will determine how aggressive Roche needs to become in terms of follow-up bids," Muken said.

Roche Chief Executive Severin Schwan said the company had no intention of raising its offer for San Diego-based Illumina, which was founded in 1998 and employs just over 2,000 people.

But Roche has taken a similar tack in previous acquisitions only to come back with higher bids, as was the case in its purchase of Ventana Medical Systems and buyout of Genentech.

"It does feel like it's Roche's initial bid at only about a 15 percent premium (actually 18 percent) to yesterday's close," said Mizuho Securities analyst Peter Lawson, who expects the final price to be in the $60 to $80 per share range. "They kind of play this game of sitting around for a while on the bid."

Pharma industry bankers say Abbott Laboratories (ABT.N), Amgen (AMGN.O), Siemens (SIEGn.DE) and General Electric (GE.N) are all potential interlopers who would look at Illumina's business, but they question whether any would make a competing bid.

HUNKERING DOWN

With Schwan as its diagnostics chief, Roche in 2008 overcame months-long resistance from test maker Ventana to snap it up for $3.4 billion. It had made an unsolicited, low-end bid, before increasing its original offer by 19 percent.

"When you look at the Ventana situation that gives you somewhat of a window into how they're likely to handle this," said Deutsche Bank's Muken, adding that it will likely take another bidder to drive the price north of $60.

Illumina investors will likely point to the fact that company shares were worth more than $77 as recently as July to argue for a higher bid. The stock has dropped due to uncertainty over academic and government research spending that has hit the entire life sciences sector particularly hard.

The Roche offer equates to about 30 times Illumina's forecast 2012 earnings, and more than a 60 percent premium to its December 21 closing price just before takeover chatter boosted shares.

A deal for Illumina would help Roche's large diagnostic business. It could also boost Illumina's market position as it faces fiercer competition in the genomics space.

"(A deal) will help Roche sustain its leadership position in targeted therapies, which we consider as highly promising," said Bryan Garnier analysts in a research note.

Mizuho's Lawson notes that Illumina is seen as having the dominant technology in the space, "but there are some very interesting technologies coming through on the sequencing side, for instance Life Technology's (LIFE.O) Ion Torrent instrument, that puts things on a new curve."

Earlier this month, Life Tech said it would sell a tabletop machine that can sequence a person's entire genome for just $1,000, turning a research tool into a device that could become commonplace in medical clinics.

Many analysts and scientists believe that sequencing technology, which could lead to discoveries of genetic links to many diseases from autism to cancer, has the potential to revolutionize medicine.

UNWILLING TO TALK

Basel-based Roche, which currently owns a very small number of Illumina shares, said it plans to start a tender offer because Illumina was not willing to negotiate a transaction.

"Roche has made multiple efforts to engage with Illumina in order to reach a negotiated transaction, but Illumina has been unwilling to participate in substantive discussions," it said.

The deal would be Roche's largest since it bought the remaining stake in U.S. biotech Genentech for nearly $47 billion in 2009. It would be financed from available cash and borrowing under its credit facilities, Roche said.

The company also said it would nominate a slate of independent candidates for election to Illumina's board.

"It is our strong preference to enter into a negotiated transaction with Illumina," Schwan said.

Illumina urged shareholders to take no action pending a recommendation from the board.

Capital Research Global Investors, Baillie Gifford & Co, Sands Capital Management, Morgan Stanley Investment Management and Jennison Associates are the five biggest shareholders of Illumina. They collectively own about 44 percent of the company's outstanding shares, according to Thomson Reuters data based on filings.

Roche shares closed down 2.8 percent at 160 Swiss francs, lagging a 1 percent drop in the European healthcare index .SXDP. Shares of Illumina rivals Life Tech and Affymetrix were up more than 3 percent each.

Roche said it has hired Greenhill & Co and Citigroup as financial advisers. Goldman, Sachs & Co and Bank of America Merrill Lynch are acting for Illumina.

(Additional reporting by Sakthi Prasad in Bangalore, Ben Hirschler in London and Bill Berkrot in New York; Editing by Chris Wickham, Mark Potter and Michele Gershberg)

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